Texas Employer Handbook Insight on Employment Law for Texas Businesses

Employment Law 101: Explaining the Rules of Overtime Pay

Posted in Handbook Articles

Who, What, Why . . .

Who does it apply to: Overtime is governed by the Fair Labor Standards Act. Without a long discussion about the .1% of employers who might not be covered, the simple answer is – virtually everybody. That said, it does not apply to independent contractors or volunteers.

What do I have to do: Everyone knows they are supposed to pay overtime at 1½ times the employee’s “regular rate” for “work” over 40 hours in a “workweek” (unless the employee is exempt). Where it gets tricky is trying to make the calculation without a clear understanding of what the law means by “work”, “regular rate”, and “workweek”.

What is a “workweek”: Let’s start simple. A workweek is any consecutive 168 hour period (7 days for those of you pulling out your calculator). Most businesses use the traditional Monday to Sunday model, but you can define it anyway you want as long as you are consistent.

What is the “regular rate”: The regular rate is usually equal to the hours worked divided by the total pay received for that week. For many this calculation is relatively simple. The employee works 40 hours and is paid $400. Dividing $400 by 40, you get a “regular rate” of $10.00, which happens to be the hourly wage of the employee. In other instances, it is more complicated but still is dependent on the number of hours worked:

Salary: The regular rate is salary earned in a week divided by 40.

Commission Paid Weekly: Add any non-commission earnings to the total commissions earned and divide by the hours worked (including hours over 40).

Commissions Paid Over Another period: The regular rate is calculated by the non-commission earnings in that week divided by the hours worked until the commissions are paid, at which time they must be calculated and added back in to the workweek earned so that overtime can be retabulated and any difference compensated.

Piece Work (workers paid by the completed piece): Tabulate the hours worked during the week (including hours over 40) and divide by the total earned from piece work.

Multiple Hourly Rates (some people get paid different rates for travel time): Tabulate the total earned at the combined rates during that week (including hours over 40) and divide by the hours worked.

What is “work”: What counts as work seems deceptively simple. It includes the minutes employees spend on the clock, but employers often miss time that counts:

Fringe Time: Time employees spend working that is not part of their regular work time, including, for example, the time it takes to log into a computer to clock in electronically.

Waiting: Time spent waiting counts as work unless the employee is completely free to use the time for their own purposes (including leaving the workplace) and the interval is long enough. A 30 minute break while a machine is repaired probably would be considered work, while a two hour break where the employee may leave probably would not be considered work time.

On-Call: Wearing a pager or have a cell phone away from work is not usually considered work as long as the employee can use the time for their own purposes. Being stuck at your place of business or prevented from using the time for yourself, however, does count.

Training: Involuntary training counts as work.

Sleep: On a shift lasting less than 24 hours, sleep time usually counts as work (think fireman or ER doctor).

Travel: Everyday travel to the workplace is generally not work, but travel during the work day counts. Also, travel for a unique purpose counts.

Aren’t some employees exempt from overtime: Some employees are exempt, but less often than many employers think. Look for next month’s issue.

Common Situations:

Vacation and Overtime: An employee takes two vacation days during the week, but upon return has so much to do that the employee manages to log 40 hours of true work in the remaining 3 days. You do not have to treat the vacation as 16 hours worked and pay overtime, the law only considers hours truly worked.

Breaks: Employees at Acme Brick are required to take a 10 minute break twice a day and that time is deducted from their pay. Interestingly enough, any break less than 20 minutes is considered beneficial to both the employer and employee and is counted as “work” time. Note, however, that employers are not required to give any breaks for smoking, lunch, or any other purpose (except nursing mothers and possibly by local ordinance, e.g. Austin, Texas requires a 10 minute break per 4 hours for construction workers).

Holiday Pay: Employees at Bah Humbug, Inc. are required to work on holidays and paid straight time. No problem. Employers are not required to give days off or pay even standard overtime for holidays.

Salary and Fluctuating Hours: Joe works 43 hours one week and 37 for the next two week before going over 40 again. Joe receives his standard salary even though he does not work 40 hours in some weeks, plus, his employer must pay overtime for the weeks over 40. If Joes schedule has enough regular fluctuation, he and his employer can make an agreement (preferably in writing) for “Chinese Overtime”, by which Joe earns just the ½ overtime premium for overtime hours.

Semi-Secret Overtime: Beth’s shift ends each day at 5:00, but she routinely leaves the office at 5:25. You don’t pay close attention to what she does during that time but you have reason to believe she works. If you know or have reason to believe an employee is working overtime – even if they don’t report it – you must investigate and pay any overtime due.

What Should I do:

Good: Be careful to calculate overtime correctly. Keep employee time records three years. Make employees clock in and out for lunch. And, don’t forget the most common mistake: salary employees aren’t necessarily exempt from overtime!

Better: If you have salaried employees that earn overtime, but have regular fluctuation between weeks over and under 40, make an agreement to pay “Chinese Overtime”.

Best: In addition to the above, have employees acknowledge to any travel policies you may have. Require all employees to report any other employee they observe working but not reporting overtime. Finally, have employees sign off each week that their hours are correct.